Personal Finance: Diamonds aren't so rough

THE MARKET crash has sent investors scurrying for commodities which will be proof against the slump in shares but still give a strong rise in value as soon as growth resumes. Gold, platinum and diamonds are often used as refuges in times of uncertainty.

Gold has again proved its value in places like Indonesia, Malaysia and Russia where the currencies have collapsed. But gold earns no interest, and although it was a good investment in the 1970s when inflation was high, in recent years it has failed to provide investors with much protection. Platinum and palladium have performed better than gold, but prices are still well below their best levels.

Oil prices are even more depressed at the prospect of a recession and falling demand. Mining shares reflect this. Rio Tinto shares have fallen 40 per cent from their peak last October, although dividends are good. Lonrho, which is now a pure mining company after hiving off its other interests in May, has also fallen by a third in the last year, but the shares now yield 8 per cent.

The price of cut diamonds is still tightly controlled by the De Beers cartel. The cartel invites buyers for the jewellery trade to make sealed bids for parcels of gemstones. There is no secondary market for small investors.

A number of punters got their fingers burned in the 1970s when there was a brief speculative boom in diamonds as a retail investment and hedge against inflation. Small investors found themselves having to try to sell second-hand stones back to retail jewellers and discovered to their cost that the margins between buying and selling are very wide, and fashions in cut stones change.

But the diamond market as a whole is still relatively stable, partly because the cartel maintains a balance between supply and demand simply by reducing sales when demand is likely to be weak.

Investors who want a piece of the action will do better to buy shares in diamond companies. Shares in De Beers currently reflect the fact that it is having to hold substantial stocks to manage supply and demand and maintain its policy of gradually increasing prices just ahead of inflation. Last week De Beers shares were trading at pounds 8.50, compared with almost pounds 20 a year ago. At that price they are valued at nine times annual earnings.

Although De Beers still controls up to 90 per cent of worldwide diamond sales, there are a few independent producers that in effect ride on the back of De Beers and the cartel, exploiting the price stability.

Firestone Diamonds was formed in 1996 to mine alluvial diamond deposits in South Africa, and it floated on the Alternative Investment Market earlier this year at 114p a share. It was caught up in the downturn in share prices and is now trading at around 86.5p.

There is no immediate prospect of a dividend but the company hopes to declare a profit in the current year which ends in June 1999. The shares look a better bet at 86.5p, given the expected stability in the diamond price relative to most other economic variables. The main threat to an investment in diamond shares is the political outlook in South Africa.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    MBDA UK Ltd: Indirect Procurement Category Manager

    Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

    Day In a Page

    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee
    World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

    Max Brooks honours Harlem Hellfighters

    The author talks about race, legacy and his Will Smith film option to Tim Walker
    Why the league system no longer measures up

    League system no longer measures up

    Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
    Valentine's Day cards: 5 best online card shops

    Don't leave it to the petrol station: The best online card shops for Valentine's Day

    Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
    Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

    Devil in blue Costa is a reminder of what Liverpool have lost

    The Reds are desperately missing Luis Suarez, says Ian Herbert
    Ashley Giles: 'I'll watch England – but not as a fan'

    Ashley Giles: 'I'll watch England – but not as a fan'

    Former one-day coach says he will ‘observe’ their World Cup games – but ‘won’t be jumping up and down’
    Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

    Greece elections

    In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
    Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

    Holocaust Memorial Day

    Nazi victims remembered as spectre of prejudice reappears over Europe
    Fortitude and the Arctic attraction: Our fascination with the last great wilderness

    Magnetic north

    The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness